Standing Committee A

[Sir John Butterfillin the Chair]
(Except clauses 13 to 15, 26, 61, 91 and 106, schedule 14, and new clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984)

Clause 30

Temporary increase in amount of first-year allowances for small enterprises

Amendment moved [this day]: No. 60, in page 28, line 20 [Vol 1], leave out ‘12' and insert ‘24'.—[Julia Goldsworthy.]

John Butterfill: I remind the Committee that with this we are discussing amendment No. 61, in page 28, line 31 [Vol 1], leave out from ‘in' to end of line 32 and insert
‘2006-08 or financial year 2006 and 2007.”.'.

Julia Goldsworthy: Amendments Nos. 60 and 61 are probing amendments dealing with the proposed changes to the time scale to which the increase in the amount of allowance for small enterprise applies. Clause 30 proposes to increase for one year the first-year capital allowance for spending by small businesses from 40 per cent. to 50 per cent. The amendments propose to increase that time to two years.
I seek the rationale behind the Government’s decision to propose the increase for only one year. I should be interested to know the Minister’s opinion on how capable small businesses are of responding to relatively small and rapid changes. If the changes proceed as proposed by the clause, that will represent year-on-year change in the capital allowance for four years. I have received many representations expressing concern that that uncertainty will undermine business confidence about how the allowances can be used. Has the Department assessed how such a small temporary change will affect small businesses’ behaviour?

Brooks Newmark: Does the hon. Lady share my earlier concern that the Government are dealing with the issue wrinkle by wrinkle? What the Government really need is a major facelift in dealing with the issue of R and D tax credits. They should use a big bang, rather than doing things slowly and one by one.

Julia Goldsworthy: The issue is whether the Treasury decided that it wanted creases down the front or not. It seems to keep changing every year.
I know that the Minister does not particularly approve of the report referred to earlier, which was undertaken for the Institute of Chartered Accountants in England and Wales by the Manchester and Nottingham business schools. The report examined the role of tax incentives in capital investment and expenditure. Looking specifically at the capital allowance issue, the report found that
“if it is intended that the capital allowances regime should provide positive incentives to increase or accelerate the level of investment in capital, this is not being achieved. Capital allowances, with the exception of some generous investment incentives such as those for environmentally friendly investment, are too small to influence the expected payoffs from the investment.”
The Minister has already expressed his concerns about the small scale of the study, and other hon. Members have referred to it as a focus group. Does the Treasury know whether the businesses claiming such capital allowances are aware of the fact that the capital allowance has increased and select it, or do its figures showing take-up of the scheme actually reflect small businesses that have already made a business investment decision and then look to see what allowances are available?
It is doubtful that capital allowances accelerate investment. Any further uncertainty would undermine it.

Mark Hoban: I welcome you to the Chair for our proceedings this afternoon,Sir John. Those of us on the Conservative Benches look forward to serving under your chairmanship. I am sure that you will ensure that the business of the day proceeds as smoothly as it did this morning.

Rob Marris: Without wrinkles.

Mark Hoban: The hon. Gentleman tempts me down a route of metaphor that I do not wish to exploit further. We had too many ironing metaphors this morning for me to risk continuing with that train of thought. [Interruption.] I know that the Economic Secretary to the Treasury is getting excited because he is on the next chapter of the Bill, but it might be better for him if he can just control himself for a moment and hold his firepower for that stage—I should like to give him that advice from the Opposition side.
I want to comment briefly on clause 30 and pick up on the point that the hon. Member for Falmouth and Camborne (Julia Goldsworthy) made about the fluctuating fortunes of the rate of first-year allowances. It is worth remembering what has happened since 1998. From 1998 to the fiscal year 2003-04, first-year allowances were 40 per cent., and there was a nice period of stability, but in 2004-05 they went up to 50 per cent., in 2005-06 they went down to 40 per cent., in 2006-07 they will be at 50 per cent., and in 2007-08 they will go down to 40 per cent.
The hon. Lady suggested that the 50 per cent. rate should continue for two years. However, if small businesses are to expand, invest capital and take on some of the challenges that have been discussed in the debate, they need some stability and predictability in the first-year allowance rate. How can a business plan confidently for the future, taking into account the incentives offered by the Government, if it is difficult to predict the level of first-year allowances from year to year? Will the Minister therefore give some indication of the Government’s thoughts on how long the 50 per cent. rate will continue and when there will be stability on first-year allowances?

John Healey: I welcome you to the chair, Sir John, and I look forward to serving under your chairmanship again. The clause increases the rate of first-year capital allowances for small businesses from 40 to 50 per cent., for one year from April 2006. It is designed to assist the cash flow of small businesses and to provide enhanced funding for new investment.
The hon. Member for Falmouth and Camborne addressed the amendments that she has tabled as probing amendments and she cited again the Manchester business school survey that was commissioned by the institute. However, although the study sample was larger than the one that we discussed this morning, it was still based on interviews with only 20 respondents, which is not a terribly strong basis on which to determine important policy. Its findings do not contradict the fact that first-year allowances provide a valuable cash-flow boost to small businesses.
The purpose of the hon. Lady’s amendments is to extend to the 2007 financial year the increase in the allowances that the Government are introducing inthe Bill. I remind the Committee that it was in the pre-Budget report that we announced the package of changes of which the proposal in the Bill is a part, and there was a considerable discussion on other elements of the package in a Committee of the whole House. The package includes the one-year increase in first-year allowances for small businesses—an element that was introduced in response to submissions from a number of bodies that represent the interests of small firms. It was warmly welcomed at the time.
The hon. Lady and the hon. Member for Fareham (Mr. Hoban) asked for an explanation of the thinking behind the decision. Although we recognise the value of certainty and stability in the tax system, we have to ensure that the system is responsive to increasingly flexible and global business pressures. That was manifest in the package of announcements of which this proposal is a part and which was set out in the pre-Budget report. The Government are committed to supporting small firms, and we shall keep the options that may be appropriate for the future under close review. In doing so, we shall try to ensure that small business support is provided in the most effective way, but in a manner that is consistent with a set of principles that could be summarised as simplicity for businesses that comply with their tax and legal obligations, support for small businesses that have aspirations to grow and determination to maintain the attractiveness of the United Kingdom as a business location. The amendments would tie our hands rather than enable us to continue to work with business interests on these factors.
I emphasise that the changes in clause 30 were not only requested by business organisations; they were also welcomed when we announced them. On 5 December, the Federation of Small Businesses said:
“We welcome the small business measures and the simplification they will offer, especially the corresponding increase in the level of capital allowances that can be claimed by small businesses.”
On the same day, the Institute of Directors said:
“The replacement of the zero rate corporation tax by increased capital allowances for small businesses was welcome.”

Mark Hoban: The Minister spoke of turning capital allowances on and off as part of a package. We need to remember that the abolition of the zero rate corporation tax is not just for this year, yet one of the measures that he offers in compensation is for one year only.

John Healey: The hon. Gentleman is right. The matter was debated in Committee of the whole House. I quoted the responses of business representative organisations, such as the Institute of Directors, to the package that was announced, including the moves on zero rates. The Institute of Directors supported that move, or gave the response that it did on 5 December, because it will reduce the differences in taxation for small businesses, depending on how they are organised. He will remember that that was the principal rationale for the moves that we have made on the zero rate.
Finally, the response and the welcome from those organisations is significant not only in policy terms, but because it may help to deal with the concern of the hon. Member for Falmouth and Camborne about how small firms will become aware of the changes. In addition to the sources of Government-sponsored advice and information, we would expect their tax agents and advisers to play a large part in ensuring that they are aware of changes that may benefit them.
However, organisations such as the Institute of Directors with its large membership and the Federation of Small Businesses with its federated network also have an important role to play in helping to ensure that their members and small businesses in general are fully aware of the tax support and benefits. On that basis, I hope that the hon. Lady will feel comfortable about withdrawing the amendment.

Julia Goldsworthy: I must apologise, Sir John, for not yet welcoming you to the Committee. That was perhaps due to my eagerness to debate the amendments.
I listened carefully to the Financial Secretary’s response. I am keen to press upon him that the issue is not simply awareness of the allowances, but whether there is an incentive to take up the first-year allowances or whether it is something that small businesses come to after they have made the decision to invest. The support for the proposals, which have been welcomed by many parts of the industry, has not been entirely unqualified. Although it refers to the changes as beneficial changes, the Chartered Institute of Taxation said that
“this constant change and uncertainty undermines the effectiveness of any particular beneficial change and generally increases the complexity of the system unnecessarily”.
On the basis that the Financial Secretary has spoken of his commitment to small businesses and has left the door open to greater stability and consistency in future, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 30 ordered to stand part of the Bill.

Clause 31

Meaning of “film” and related expressions

Theresa Villiers: I beg to move amendment No. 30, in page 29 [Vol I], leave out lines 3 and 4.
I join the rest of the Committee in warmly welcoming you to the Chair, Sir John. I also congratulate the Economic Secretary to the Treasury on his recent appointment. I look forward to a constructive and positive debate on film tax this afternoon.
Before turning to the substance of amendmentNo. 30, I should like to start with some general remarks about part 3 and the Government’s new film tax-break regime and its history. Strictly speaking, the latter might be more suited to the debate on clauses 46 and 47, but as it is important that we learn from our mistakes, it would be useful to take this matter at this stage in order to set the scene and background for the new framework proposed and the Opposition’s amendments to it. I am conscious of the need to make progress, so as I have indicated informally, I should be happy for the debate on the amendment to cover the clause stand part debate without the need for any separate discussion of the clause.
I start by declaring that my sister-in-law is a film producer. I do not think that it counts as a declarable interest, but I thought I would mention it just in case. Like the Government, the Opposition believe that it is important to work to ensure that the UK provides a competitive and attractive environment for the film industry for commercial and cultural reasons. However, although we understand the Government’s motivation in their film tax-break regime and we, too, want a successful and sustainable film industry in the UK, we have serious concerns about their effectiveness in that area to date.
The Chancellor’s film tax regime has a chequered history. The costs of film tax relief spiralled from£10 million when it was initially introduced in 1997-98 to £520 million in 2004-05 and to a staggering£560 million in 2005-06. They are huge sums when one takes into account the fact that the UK’s entire cinema sales were only £770 million last year. It seems clear that many used the tax breaks in a way that the Treasury did not intend, and that a significant proportion of the revenue lost to the Exchequer did not directly benefit film producers and production.
Many of the funding arrangements developed under the section 42 and section 48 reliefs that we are proposing to abolish had much more to do with reducing the tax bill of a limited number of high net worth individuals than any desire to make films. The outgoing regime depended on investors to provide funds through complicated sale and leaseback arrangements, which gave rise to a veritable industry of tax avoidance schemes. As Revenue and Customs set out in its recent consultation paper, that led to considerable problems. It said:
“Whilst the current film tax relief has ensured the production of many valuable British films, the financing structures that have been used to access them have affected their value for money for the taxpaying public, calling into question their fairness and effectiveness. The repeated use of tax avoidance schemes around the current film tax relief has also involved significant Exchequer cost and there remains a clear Exchequer risk in the current reliefs. This has resulted in fluctuating and, at times, untenable levels of Exchequer costs over the years the reliefs have been in operation.”
Some of the aggressive structures allowed investors to make high rates of return that were almost risk-free, and some schemes apparently allowed investors to claim more in tax relief than they invested. Loopholes included so-called double dipping, which enabled film producers to claim tax relief twice on the same production—on production costs and the sale and leaseback of the final film.
In September 2003, the Culture, Media and Sport Committee stated:
“The historical cycle of change in the tax regime was presented to us by the majority of witnesses as a huge disadvantage to the industry.”
Although acknowledging the problems flowing from aggressive avoidance schemes, the Chartered Institute of Taxation said recently:
“We think there has been too much tinkering with the tax system. As with other relieving provisions, the government introduces a relief and then expresses surprise when taxpayers obtain the benefit of it.
Then the relief was withdrawn or redrafted.
More careful thought and consultation would have resulted in better legislation.”
Since the Chancellor first introduced his tax break, the rules have been amended in the Finance Acts in 2000, 2002, 2004, 2005 and now again in 2006. The continual change has caused uncertainty, damagingthe competitive position of the UK as a destination for the film industry.
The announcement of a further review last year unsettled the industry yet again. Harry Hicks, a film tax consultant with Grant Thornton, commented:
“The quicker we see the new legislation in full, together with HMRC’s proposed interpretation of its practical application, the better. In the meantime, I fear that many projects will be prevented from going ahead whilst financiers and bankers simply sit on the fence and wait and see how the new tax breaks will operate in practice”.
His firm predicted a downturn in the film business in 2006. It would be useful if the Minister gave us an insight into recent levels of investment in the film industry. Pinewood’s profits fell from £6.5 million to £571,000, which it attributed in part to the uncertainty caused by the pending new regime.
Problems were also reported with several other films: “Lassie” was due to be filmed at the book’s original British locations but was moved to Ireland, “The Libertine”, starring Johnny Depp, moved to the Isle of Man, and, most controversially, James Bond’s 21st film outing in the remake of “Casino Royale” will be the first of that long-running series to be shot predominantly overseas. Pinewood, Bond’s traditional home since “Dr. No”, lost out to Barrandov studios in the Czech Republic. Tim Adler of Screen Finance commented:
“For the Government to allow its most high profile civil servant to go abroad is extraordinary”.
Certainty is of key importance, and it will be the theme of a number of the amendments that I table. If there is significant uncertainty about how our rules operate and will operate in future, that will deter the large US studios from investing in the UK and making films here. Uncertainty probably has an even bigger impact on indigenous, independent film producers, because it impacts so significantly on their ability to raise finance for their film projects. They are unlikelyto have the ready cash available, so they must borrow to finance their projects. If this regime is to be successful, we must ensure that film producers can borrow against the tax credit. If the rules are uncertain, the risks will be higher and the banks will be reluctant to lend; where they do lend, it will be at significantly higher rates. Currently, few if any banks are willing to lend pending resolution of the new structure.
While we regret that it has proved necessary to introduce yet another revision of the rules, we agree with the Government that changes are necessary to deal with the problems I have outlined and the significant loopholes in the existing framework. There is no doubt that the proposed new framework is an improvement on the current rules and that it has received some positive comment from many of those who are affected by it. In particular, the Opposition agree that it makes sense to amend the framework to try to ensure that the benefits can be claimed only by the companies who are making the films.
We still have several reservations about the proposals. I have tabled a series of amendments that seek to elicit clarity from the Government about a number of points that have been raised with me by the film industry and by those who are affected by the new framework. As I said, the amendments were tabled in a constructive spirit to try to ensure that we end up with a framework that achieves the goals that the Government have set.
Turning to clause 31 and amendment No. 30, the clause defines the meaning of the word “film” forthe purposes of the tax regime. Anyone who produces a film as defined by the clause will automatically fall within the new framework, although they will qualify for the tax break—the enhanced deduction or tax credit—only if they also comply with the conditions set out in clauses 32 to 41.
I want the Committee to consider clause 31(2), on films produced as a series. Amendment No. 30, which I moved, seeks to delete paragraphs (a) and (b) from the clause and deal with the fact that the Bill currently provides that unless a series complies with all of the criteria set out in subsection (2) each film will be treated as a separate film for the purposes of taxation. Paragraphs (a) to (c) require that the series has no more than 26 episodes, that the total length is no more than 26 hours and that it
“constitutes a self-contained work or is a series of documentaries with a common theme”.
The cumulative conditions of subsection (2), particularly paragraphs (a) and (b), could cause considerable practical problems if the legislation goes ahead as it is. For example, a TV series that has a significant number of short episodes would fall outside the cumulative conditions of those paragraphs. There seems no sensible reason to treat such a series as separate films for the purposes of taxation, nor is there any obvious reason why a series of more than 26 hours should not be treated as a single unit for film tax purposes.
As the Chartered Institute of Taxation pointed out in its briefing on the Bill, the cumulative conditions would give rise to a considerably increased compliance burden because of the requirement to treat each episode of a series as a separate trade. Schedule 4 treats each film as a separate schedule D case 1 trade. For example, TV companies producing long-running soaps will be required to keep separate tax records, monitor costs and estimate the total future income for each individual programme. They will have to track the loss position for each separate episode, and that will involve considerable extra cost.

Rob Marris: Does the hon. Lady think that the British taxpayer should subsidise through tax breaks the production of soap operas?

Theresa Villiers: No. I was just coming to that. TV companies cannot qualify for the tax break as their programmes are not intended for theatrical release, but, because of the way the legislation is structured, they come within the taxation framework that is being introduced. They are concerned about getting an additional compliance burden without any chance of getting a tax credit. That is why I am discussing the clause with particular reference to TV companies. I am not suggesting that we should extend the tax credit to cover them—that would be inappropriate—but we must mitigate the compliance burden that clause 31 would impose.
I have also tabled an amendment that we shall discuss later which would take TV companies that do not qualify for the tax break out of the overall taxation framework in the Bill. That would also deal with the problem.
I hope that the Economic Secretary will explain why he thinks it inappropriate to consider a series of short episodes to be a single film and a single trade for the purposes of taxation.
To conclude, clause 31(2)(c) deals with the connection that there needs to be between films in a series. Perhaps the Minister would like to expand on that. It seems that it could involve subjective judgments as to whether a series of films is sufficiently connected to qualify under paragraph (c). One example that springs to mind is the series of Harry Potter films. Would they be considered sufficiently connected to come within the paragraph? If we leave uncertainty and subjective judgments in the framework, they could lead to disputes about the level of the tax credit, which of course will drive up the cost of borrowing against it. That was one of the general points in my introduction. I look forward to the comments of members of the Committee and the Minister.

Edward Balls: May I start by echoing the words of the hon. Member for Chipping Barnet (Mrs. Villiers) and say that it is a great pleasure and privilege to serve for the first time on the Front Bench in a Committee under your chairmanship, Sir John? I thank you for your indulgence in allowing us to debate the amendments and discuss clauses 31 and 32 at the same time. In discussing those two clauses, I shall deal with several issues that were referred to by the hon. Lady and that are pertinent to the Bill.
I thank Opposition Members for their kind, warm words of welcome last week to those on the Front Bench and particularly the hon. Member for Fareham for his comments a moment ago. I served for 20 hours last year during the proceedings on the Committee dealing with the Finance (No. 2) Act 2005 and, until today, I would not have recognised the concept of becoming over-excited in Committee. After the fine speeches of the hon. Member for Fareham and my hon. Friend the Member for Wolverhampton, South-West (Rob Marris), I would not say that I was over-excited, but there have certainly been moments of interest.
I shall start by following the lead of the hon. Member for Chipping Barnet in making some introductory remarks about chapter 3 in general and clause 31 in particular. I will then turn to the points that she made about the amendment. I have some comments to add to hers about the context of the new tax credit for British films. She made many points about that context with which my hon. Friends and I could agree. At times, it was almost as if she had seen some of my speaking notes, so I shall make sure that I do not repeat any of her words.
The importance of British cinema to our cultural heritage was obvious from the hon. Lady’s comments in welcoming the importance of the clauses. It plays an important role in Britain and around the world in building a sense of national identity and propagating it beyond our borders. Our aim in the clause is to continue to provide and enhance the support necessary to encourage a sustainable British film industry in what is an increasingly competitive environment. That can be done in a range of ways. For example, the Department for Culture, Media and Sport supports the film industry in a number of ways directly through grant support. However, the tax system also plays an important role. The UK is not alone in this: many countries around the world do the same. All large countries use their tax system to some extent to provide incentives to support film production.
As the hon. Lady said, the previous tax reliefs for British films have been in place since the beginning of 1992 and, in 1997, they were enhanced and tailored to meet the needs of small films. In that time, as she explained, expenditure on British film production has risen from around £98 million in 1992, when the reliefs were first introduced, to £569 million in 2005. Over that period, attendance at cinemas in the UK hasrisen from 98 million at the beginning of the 1990s to 264.7 million last year. It has clearly been the case that as the strength of the British film industry has grown—along with its use of tax relief—cinema audiences have grown as well.
The hon. Lady mentioned “Harry Potter and the Goblet of Fire”, and many other British films have been produced in recent years. In the last year and a half, “Charlie and the Chocolate Factory”, “Nanny McPhee”, “Pride and Prejudice” and “Bridget Jones: The Edge of Reason” were released. I have seen some of these films, but I must admit I have never seen other British films such as “Layer Cake”, “Kinky Boots” or “Ladies in Lavender”. I am told, however, that the production of these films was based in Britain.
In response to the hon. Lady’s point about the danger of the number of UK films dropping off, I point out that, in 2004, the number of British productions was 133. In 2005, during which the debate about these reforms was ongoing, the number fell, but only marginally—from 133 to 124. Numbers for this year will show the continuing engagement of the British film industry in the production of films.
Unfortunately, as the hon. Lady said, there is another side to this story. Throughout the lifetime of the old reliefs that the Bill will deal with, there have been examples of abuse and of people using those reliefs not as an aid to film production but as a convenient way of avoiding tax. That is why anti-avoidance legislation aimed at protecting the Exchequer from abuses of film tax reliefs has been enacted regularly. Such reliefs have featured in a number of Finance Bills.
The hon. Lady referred earlier to the consultation document produced last summer, which contains a full explanation of how the previous reliefs, which were inherited in 1997 and continued since then, have been subject to abuse, particularly from sale and leaseback schemes and, more generally, because people who are not really film makers or producers used such reliefs for tax purposes. There is a very long list on page 13 of the consultation document of all the different times in Finance Bills from 2000 onwards that action has had to be taken to try to tackle that abuse and those problems. 
We announced in last year’s Budget that there would be a formal consultation on a new approach to reliefs for the film industry to remedy the defects of the predecessor regime. As that consultation document exemplifies, there has been an intensive, constructive consultation over last summer, leading up to the details of the new relief being announced in the pre-Budget report in 2005 and a complete change in the conceptual basis on which film taxation support will be provided.
The change will mean that the targeting of the relief will now shift directly to the film production companies, rather than indirectly through the financiers, investors or other intermediaries. That means that not only will film makers no longer have to share the benefit of the reliefs with others, but it will also bring an end to the tax-driven sale and leaseback structures used extensively by film financiers to access relief, which has been the source of so much tax avoidance in the past.
A further significant way in which the new relief differs from its predecessors is that, for the first time, its value to film makers is directly related to the amount of work actually done in the UK. Previously, eligibility for tax relief was determined by the certification of the film as British under schedule 1 of the Films Act 1985, and the way in which the certification rules worked meant that it was possible to claim the relief on the total production budget, even where little, if any, filming took place within the UK. Instead, the new relief provides a direct incentive to make full use of film making skills, facilities and infrastructure in the UK.
Another important feature, which we will debate later when we get to the loss provisions and the details of schedules 4 and 5, is the way in which this relief is now designed to encourage genuine sustainability in the British film industry. The value of the reliefs will be greatest where film is profitable and where its income is retained within the UK, rather than sent offshore, and there are also incentives for film makers to reinvest profits from films in the UK, particularly in the production of further British films.
Together, the various elements of the new relief constitute a package designed to give genuine reassurance of the Government’s continuing support to the film industry. We have already announced the rates at which the relief is set, which will mean that small budget films will be able to claim a guaranteed minimum benefit worth 20 per cent. of qualifying production costs, while large budget films will be able to claim a benefit typically worth 16 per cent. of qualifying production costs. By targeting the new relief at film producers, the provision will be much better focused and more effective in fulfilling the Government’s objectives for the film industry. As John Woodward, chief executive officer of the UK Film Council, has said, the new relief marks a new era for the future growth of our industry, which operates in a highly competitive global marketplace.
We take seriously the comments of the hon. Member for Chipping Barnet about the importance of moving forward expeditiously to ensure that we have no unnecessary uncertainty. It is important that we move expeditiously through the debate on the clauses and amendments, because there is a danger that, if we take too long over the details, we will add to the uncertaintyÂ rather than resolve it. Margaret Matheson, a producer, from Bard Entertainments, has said:
“Yes, there will inevitably be delays involved in the changeover. That is unfortunate, but this time next year we will have forgotten about it.”
I am not so sanguine as to believe that people will have forgotten, but once the film industry sees the scale and benefits available under this new support, we will be able, as John Woodward said, to move into a new era with substantial benefits to the British film industry for making films in Britain, with British employees and British ideas.
Amendment No. 30 would relax the test under which a series of films is treated as a single film by removing the requirement that it must not have more than26 separate parts or a playing time of more than26 hours. A series that has fewer than 26 parts can be considered to be one film, whereas a long-running series such as “EastEnders” or “Friends”, if produced in Britain, would have to be accounted for under tax purposes on a case-by-case and episode-by-episode basis. The 26-part, 26-hours test is a purely administration decision. It does not make any difference to the favourability of the tax treatment; it is only to do with the way in which the tax is accounted for.
A 10-hour episode TV drama would be treated as a single film, but a long-running series such as “Friends” or “Blue Peter”, if they were being made as a TV series, would not be treated as single films. They would instead be treated for the purposes of the tax regime as separate trades. That is not new; it simply reproduces a requirement under the Films Act 1985 that has been in force since 1999 and is based on our consultation with not only the film industry, but the TV industry.
In our view, the requirement will not involve any significant concerns. It is quite in line with practice in the industry. A series such as “Parkinson”, the “Jonathan Dimbleby Programme” or “Davina” does not begin with the assumption that it will be made in perpetuity. People will want to be sure that they are making a return case by case, that the audience figures match it, and that the costs are being covered episode by episode. On the basis of the consultations, our understanding is that that is in line with how the industry chooses to organise itself and therefore should not cause a problem. On that basis, we urge the Committee to reject the amendment.
The hon. Lady referred to the broader issue of whether we are right to try to have a single regime for the treatment of films, and TV and DVD production, whether or not they qualify for the enhanced tax relief that comes from their being made in Britain as a British film for cinema showing. For the benefit of members of the Committee, I must say that a key requirement is that at least 25 per cent. of the film has to be made in Britain, an important matter that we shall be discussing later.
The existing treatment of film production is based on the principle that film makers exploit the films to generate income from their use rather than by selling them. It is also tied to the completion of the film at which point a trade of exploitation can start. At that point, the cost of creating a film is deemed to be a normal trading expense. However, on the evidence of our consultations so far, that fits pretty badly with the way in which the industry works, how it accounts for itself and how the accounting model was put to us during those consultations.
The industry regularly makes films for immediate sale or in a way that pre-sells almost all the exploitation rights to generate income to fund the film. Rather than the tax treatment occurring at the end of the process when the film is completed, it makes more sense to calculate taxable income on a cost basis through the lifetime of the production of the film. That is why we are structuring the tax reliefs under schedules 4 and 5 to follow the principles that are used to account for income and expenditure on long-term contracts. Although the treatment is essential for the new film tax relief, it also provides a firm foundation for other film production companies, such as those making films for TV or for transfer to DVD. Nothing that we have been told by the industry suggests that the working of those industries will find difficulty with that.

Helen Goodman: Before my hon. Friend sits down, I have a question following on from the points made by the hon. Member for Chipping Barnet. Subsection (2)(b) says:
“the combined playing time is not more than 26 hours”.
In the consultations, did officials or Ministers consider more avant garde installation events shown in museums and art galleries that may last for more than 26 hours, with a film playing on a continuous basis, or where a film is on a loop?

Edward Balls: I am grateful to my hon. Friend for that intervention. We consulted widely with the film and TV industry. I am sure that many people whom we consulted have had their avant garde moments, but I am not sure whether we consulted any specialist avant garde producers. My feeling is that if one is making an avant garde film of more than 26 hours, it would still be one episode—one film—and would therefore count as one film for tax purposes. There may be examples of avant garde film companies that have attempted to make films of more than 26 hours in length running to a series of more than 26 episodes, but it strikes me that the idea of 26 or more episodes of a 26-hour-plus film would not necessarily be a profitable enterprise. I do not think that that particular example was put to us during the consultation.

Philip Dunne: I add my congratulations to the Economic Secretary on his promotion to the Front Bench. May I also say that is a pleasure to serve under you, Sir John?
While we are on the holistic nature of the Government’s proposals, and the fact that they are trying to bring television and film production under the same regime, I am a little confused by what the Economic Secretary is saying; it seems to fly in the face of the proposals in clause 39, under which, in order to be eligible for film tax relief, productions have to be intended for theatrical release. Several examples that he cited were clearly made for television, rather than theatrical, release.

Edward Balls: The hon. Gentleman is absolutely right. We are putting in place a way of accounting for films, television and DVD productions for tax purposes, under which enhanced relief is available only for films intended for showing in a cinema. The point that I was just concluding, in response to my hon. Friend the Member for Bishop Auckland (Helen Goodman), is that when one commences the production process, it is not always clear whether the film will be for cinematic or TV purposes. It would not make sense to do as someone proposed and have one method of accounting for tax for films that will qualify for enhanced relief, and a completely separate and different basis for TV and DVD films that will not qualify for enhanced relief.
We do not think that the proposal will be a problem for the industry; in fact, in the main, it is in line with industry accounts, and in line with the direction in which international accounting standards are moving, in terms of their reform. It is much more sensible to move to the single system proposed in the Bill for tax accounting purposes for all films, including TV and DVD films. Included in those are films intended for cinematic showing, which will also qualify, beyond the normal setting of cost against income for tax purposes, for the enhanced relief that is set out in the schedules to come.
Some have suggested that we run two completely parallel systems—a new one for cinema films, and the old one for TV films. Our view is that that is out of line with best international practice and current TV practice, and would be complex, burdensome and over-regulatory. It is much better to move over to a single system for all TV, film and DVD production, within which the enhanced relief is available only for British films produced in Britain that are for cinematic release. Having said all that and having made a reasoned case, I urge the Committee to reject the amendment in the name of Opposition Members, and to support clause 31, allowing us to commence debate on the rest of the Bill.

Theresa Villiers: I was slightly unnerved by the spooky similarity between the first part of the Economic Secretary’s speech and mine. That outbreak of consensus is welcome, although I suspect that he and I will not always find ourselves of such like mind.
The Economic Secretary also emphasised the importance of not delaying this afternoon’s debate so that we did not add unnecessary uncertainty to Bill business. I suspect that the film industry will not mind whether we take an hour or two hours to deal with the issue, particularly as most of its members are yacht-hopping at Cannes this week. I do not think that they are looking at what we are up to with great closeness. [Interruption.] My sister-in-law is not there; her film was not selected. It is important that we take time to get this issue right. We do not want to rewrite the film tax regime for the seventh time—or whatever time it would be—next year.
In a sense, it is a little difficult to respond to a number of the Economic Secretary’s points, because they tend to bleed into the debates that we will have on the coming amendments. I shall confine myself to picking up on one or two things that he said. He emphasised that the issues relating to the amendment of paragraphs (a) and (b) were administrative and did not affect the amount of tax payable. My response is to ask why we are imposing that complicated and difficult framework if it is not going to yield revenue benefits for the Government. It seems to me that we are imposing a burden unnecessarily.
For reasons that I shall go into when we explore the next set of amendments, it is impractical and not sensible to have separate regimes for TV and film companies. It is entirely possible to retain a framework for TV companies that runs along ordinary company law accounting lines, and I have tabled amendments to that effect to which I shall speak in a moment.
I remain concerned about the issue of treating each particular episode as a separate trade and have tabled amendments on schedule 4 in respect of that. I shall not press my amendment to a Division and I beg to ask leave to withdraw it, but I retain concerns about the issue and hope that the Government will take them on board.

Amendment, by leave, withdrawn.

Clause 31 ordered to stand part of the Bill.

Clause 32

Meaning of “film production company”

Theresa Villiers: I beg to move amendment No. 47, in page 29, line 14 [Vol I], at end insert
‘; but notwithstanding the provisions of this section, a company is only a “film production company” if it meets the conditions for film tax relief as set out in section 38 of this Act.'.

John Butterfill: With this it will be convenient to discuss the following: Amendment No. 64, in page 29, line 17 [Vol I], leave out lines 17 to 20 and insert—
‘(a) undertakes (whether on its own account or whether it is responsible to a third party)—
(i) principal photography and post production of the film, and
(ii) delivery of the completed film,'.
Amendment No. 31, in page 29, line 18 [Vol I], leave out ‘pre-production'.
Amendment No. 65, in page 29, line 22 [Vol I], leave out ‘pre-production,'.
Amendment No. 32, in page 29 [Vol I], leave outlines 24 and 25.
Amendment No. 33, in page 29, line 26 [Vol I], at end insert—
‘(3A) The Treasury may, by regulations—
(a) amend subsection (3); and
(b) provide that specified activities are or are not to be regarded for the purposes of this Chapter as film making activities;
and in this subsection “specified” means specified in the regulations.'.
Amendment No. 46, in page 29, line 27 [Vol I], after ‘company', insert
‘resident in the United Kingdom (and not resident in another place in accordance with the law of that place relating to taxation)'.
Amendment No. 34, in clause 34, page 30, line 19 [Vol I], after ‘on', insert ‘development,'.
Government amendment No. 26.
No. 35, in clause 35, page 30, line 37 [Vol I], at end insert—
‘But for the purposes of this subsection—
(a) services provided in relation to rented equipment shall be considered to have been performed in the United Kingdom where the equipment is used in the United Kingdom; and
(b) where goods are initially supplied in the United Kingdom, their subsequent transport and use outside the United Kingdom shall not prevent the relevant expenditure from being treated as UK expenditure.'.

Theresa Villiers: I do not propose to press amendment No. 46. Having reflected on it, I do not believe that it would be a positive change to the Bill.
Clause 32 is one of the most important and controversial parts of the new film tax structure. It defines the meaning of “film production company” for the purposes of the Bill. The clause represents one of the most significant changes to the old rules, focusing the tax advantages solely on film production companies to ensure that what the Chancellor called grey middlemen cannot get the tax advantage. As we have heard, the clause focuses the scheme on the people making the films, not on the groups of high net worth investors.
The new framework proposes that only companies falling within the definitions set out in clause 32 can be capable of qualifying for the new film tax breaks. A number of film industry sources have expressed anxieties about the definitions; many are worried that legitimate productions will miss out because of how clause 32 is drafted. In its helpful briefing, the British Screen Council stated that
“the provisions of clause 32 are very proscriptive and make it extremely difficult for genuine film production companies to qualify”.
It felt that a simpler and clearer definition should be considered.
In amendment No. 33, I proposed to allow the Treasury to refine and update the definition through regulations. The use of secondary legislation in the tax context is always problematic, and I am also conscious that it would give rise to a degree of further unpredictability and instability. However, it could be useful for the Committee to consider the idea, given the definition’s drawbacks, which I shall outline.
First, I turn to the issue that we have already started to address: that of TV companies. As we have heard, any company falling within the scope of the Bill’s definition of a film production company is covered even when it cannot qualify for the tax break. Hence, a number of companies will not be able to benefit from the advantages of the film tax regime, but will be subject to the disadvantages. As we have heard, that will concern a lot of TV companies, although not only TV companies could be involved.
Those making training videos or safety or promotional films, or airlines that produce films with guidance on safety measures could also be affected. My amendment No. 47 would remove companies from the scope of the legislation unless they were making a film that would qualify for the tax relief set out in clause 38—that is, the enhanced deduction or film tax credit.
That would leave TV producers governed by the ordinary rules on company taxation and the existing rules set out in the Finance (No. 2) Act 1992. I have tabled consequential amendments on clauses 46 and 47 to make that possible. They would deal with the problem that we have discussed because TV companies would no longer be at risk of having to draw up separate accounts for every episode of a single series.
However, there is another pressing reason to take such companies out of the framework. In general terms, the framework set up by the Bill requires that a relevant proportion of income from the making or exploiting of films is brought into account for tax purposes on an estimated basis, before it is earned. That includes income from merchandising and the use of characters and music, as well as directly attributable income.
The effect is that tax liability will be accelerated and tax will be due on income that has not yet been earned. I do not wish to anticipate our debate on schedule 4, but although applying the provisions to film companies that can qualify for the tax break is controversial, it seems even more harsh to apply what I think is a problematic regime to companies not eligible for the tax break at all. That would mean subjecting such companies for no reason to a regime harsher than that applicable to companies in other industries.
It would be useful if the Economic Secretary explained the motivation behind that new regime in schedule 4. If it is to do with a tax break and seeks to deal with some kind of tax loophole, there is no justification for applying it to companies that are not capable of qualifying for the tax break in the first place.

Rob Marris: Just to be clear, is the hon. Lady saying that, for example, each episode of “Coronation Street”, which would not meet the 26-parts rule that we discussed, would have to be treated as a separate film? Is that how she understands the legislation?

Theresa Villiers: Yes, my understanding is that that is how it works. I urge the Committee and the Economic Secretary to consider the problems in respect of TV companies.
The Committee should consider a second point about clause 32.

Sitting suspended for a Division in the House.

On resuming—

Theresa Villiers: Another key problem with the definition of film production company in clause 32 is that subsection (3) requires a company to be involved in and responsible for multiple activities before it can qualify as a film production company and potentially obtain the tax break.
Paragraph (a) seems to require that a film production company should be responsible for all activities that are listed. They include,
“pre-production, principal photography and post production...and...delivery of the completed film”.
Paragraph (b) requires the film production company also to be involved in the planning and decision making in relation to those activities, and paragraph (c) introduces a further requirement that the company
“directly negotiates, contracts and pays for”
those rights, goods and services.
An initial problem arises because there is no statutory definition of terms such as “pre-production”, “principal photography” and post production. It could be cured by regulation if amendment No. 33 were agreed to. Alternatively, the early publication of guidance notes would I am sure be welcome. However, even if that problem were dealt with, the definition would still be at odds with the way in which the industry works. It seems unrealistic to expect a single company to be directly responsible for all the listed activities in subsection (3).
The Committee knows that all industries break down their activities into specialist areas, and the division and specialisation in the film business is more marked than in any. Some of the specialist production companies in Britain are world leaders in their field, and if a single company must undertake all those activities to qualify as a film production company, many in the industry are concerned that it would mean depriving many genuine film production companies of the support of a tax break. For example, when a company films overseas, it is standard practice to hire a local production company to organise much of the work and carry out many tasks in relation to the film. In some countries, there may even be a legal obligation to hire a local firm for such activities.

Rob Marris: In paragraph (a) the second word is “responsible”, as the hon. Lady will be aware. As I read it, it does not say that in order to be a film production company, the company concerned has to carry out the activities itself; it says that it has to be responsible for them. I have a joint mortgage with my partner. I am responsible for it. If she makes the mortgage payment, it is made. I remain responsible for it, but it is not I who has made that mortgage payment.

Theresa Villiers: If the Government adopt that same interpretation and do not require direct involvement when they construe “responsible”, it will be a positive move and it will make the framework much more workable. There is a particular problem in paragraph (c) where it refers to “directly”. It says,
“directly negotiates, contracts and pays for rights”.
However, the hon. Gentleman is right. I hope that a sensible interpretation might modify any practical problems.

Brooks Newmark: But is there not the concept that companies must also be—I believe this is the expression—actively engaged in each of those activities? The concept of actively engaged goes beyond what the hon. Member for Wolverhampton, South-West implied.

Theresa Villiers: Both interventions indicate that it would be useful to obtain more clarity about that point. If one were to take a flexible interpretation, as the hon. Member for Wolverhampton, South-West proposed, it would mitigate the problems. However, if one were to take a more conservative interpretation—[Hon. Members: “Hear, hear.”]—I am not sure that that is the right word. Perhaps I should say a more restrictive interpretation.
I hope that the Minister will make it clear that a film production company is permitted to subcontract parts of the film-making process. That is the point. Without the ability to subcontract the listed activities, many companies will fail to qualify for the relief that I am sure the Government intend they should benefit from. If the terms of the clause do not include the flexibility to subcontract, the tax relief will either be very narrow or lead to a wholesale restructuring of the film industry. I do not think that the Government intend either of those results.

Jeremy Wright: Does my hon. Friend agree that if one looks ahead toclause 41, which I appreciate we will come to later, it is clear that the Government anticipate that a great deal of work will be done by qualifying film production companies abroad? The provisions require that 25 per cent. of spending be done within the country’s UK spending. It is clear that the Government accept that a great deal of work on some productions must or could be done outside the UK, so it makes sense to accept in clause 32 that a good deal of work must be done by other companies also.

Theresa Villiers: Yes, we must take a realistic view of how the film industry works if the tax break is to be effective and workable. We must ensure that film companies can subcontract and still claim relief, particularly in relation to filming overseas, as the hon. Gentleman said. I tabled amendment No. 64 to deal with that problem and to make it explicit that FPCs can subcontract without losing the tax break. I hope that the Minister can give us some assurances on interpretation.
There is a particular problem with pre-production. Paragraph (a) states that one of the activities for which the company must be responsible is pre-production. The effect is that any company not involved in pre-production will not be able to qualify for the film tax credit. Generally, pre-production tends to cover rehearsals with actors, deciding on a film location, building a dressing set and sorting out the finance for the project—activities that occur in the run-up to the roll of the cameras.
Amendment No. 31 would delete “pre-production” from paragraph (a) and amendment No. 65 would delete it from paragraph (b), which refers to involvement in the planning process. If the amendments were adopted, FPCs could still qualify for the tax break even if they were not involved in pre-production work. That is important because many companies are set up as special purpose vehicles specifically to produce a particular film. A film’s development and pre-production are often done before that special purpose vehicle is set up. Hence, it is common practice for the company making the film not even to exist during pre-production. Even if we took a flexible approach to being “responsible for” and even if it were possible to subcontract, we would still run into a significant problem if pre-production remained one of the compulsory activities for a film production company to be involved with or responsible for, because of the overall structure of the film industry.
From what I have read of the Revenue’s publications and consultation document, I understand that it knows that SPVs are commonly used in the film industry and recognises that they are useful vehicles. I understand that the Government are not seeking to change that, so I ask them to look again at pre-production. Unless that term is deleted from the section, it will become much more difficult to make a film using an SPV. SPVs often do not come into existence until film production and principal photography start because until that stage, the studio or entrepreneur might not know whether the project will actually go ahead. Once all the preparation work is done, a vehicle is set up to make the film.

Stephen Hesford: Would not the problem be solved—I think this is what the Minister may be getting at in the proposed clauses—if there were a clear link between those who bring the matter to pre-production and those who then go into production, whereby they would be one body, rather than entirely separate vehicles? They would then all be responsible, even though technically and legally they may be separate companies.

Theresa Villiers: That would not work within the framework of the Bill as it is drafted, because the Bill deals specifically with individual companies, so if the same company that makes the film does not undertake the pre-production, it cannot qualify for the tax break. That is the problem that the Opposition are getting at.

Stewart Hosie: Is the problem not compounded by paragraph (c)? It may well be the studio that negotiates contracts, perhaps pre-production and afterwards, and pays for rights, perhaps for a book or a play, and which negotiates merchandising rights and enters into contracts concerning them. However, the real production company that undertakes the filming would have nothing to do with it. The clause—especially the combination of paragraphs (b) and (c)—makes it almost impossible for the real production company to gain the benefits, because that company almost certainly would not undertake all the activities that are referred to.

Theresa Villiers: Yes. I shall address those points in a moment, but I agree with the hon. Gentleman.
To conclude my remarks on pre-production, my understanding is that the proposal made in the clause was not a requirement of the initial framework set out in the pre-Budget report. The PBR dealt with principal photography and post-production, but it did not require the film production company to be involved in pre-production. It is interesting that the Department for Culture, Media and Sport guidelines on the area, which were published only a few weeks ago, after the Finance Bill, did not mention pre-production either. There seems to be a difference of opinion, and it would certainly be useful if the Economic Secretary outlined why the Government have changed their mind between issuing the PBR and publishing the Finance Bill.

Rob Marris: I think I understand the hon. Lady’s point. However, when I look at her proposed amendments it seems to me that it would have been logical to include an amendment to delete subsection (2), which says:
“There cannot be more than one film production company in relation to a film.”
Why did she not do that? Is she suggesting that the companies that undertake pre-production before an SPV is even formed should not be counted as film production companies at all, or should not get tax breaks, or both?

Theresa Villiers: That might be one way to tackle it, but I do not think one need go that far to tackle the problem. I suspect that deleting subsection (2) might have problematic knock-on effects—I certainly believe that the Economic Secretary would be concerned if the Committee proposed deleting it. I agree that such a deletion might mitigate the problem, but it could have unintended consequences.
On the point raised by the hon. Member for Dundee, East (Stewart Hosie), there are problems with subsection (3)(c) which I have sought to address through amendment No. 32. The amendment proposes deleting paragraph (c), which requires the FPC to be directly involved in negotiations, to contract directly, and to pay directly for rights, goods and services in relation to a film. As the hon. Gentleman said, the structure of the industry can make compliance with paragraph (c) difficult. The British Screen Advisory Council has said that requiring a single company to be directly involved in all negotiations makes matters difficult, for similar reasons to those that I have outlined in relation to the earlier part of the clause.
There is a particular practical problem with the requirement to contract directly for goods, rights and services. As with pre-production, the rights may have been contracted for and bought before the SPV was brought into existence in order to make the film. There are additional problems, however, in that some key directors and actors may not wish to contract with the SPV. Some writers and directors, together with certain artists—American actors in particular—may insist on contracting with a signatory to the relevant actors’ guilds agreements. For example, many US actors will contract only with a company that has been approved by a screen actors’ guild.
Many film producers in Britain whom the Government, I am sure, would want to benefit from the tax break will not fall into that category. Currently, the usual practice is for the actor to contract with a US-based company that has the relevant SAG approval. That American company then invoices the British company for the cost of the arrangement. That indirect relationship is not contemplated in paragraph (c), so the measure could again make it difficult for several sensible and genuine film productions to fall within the scope of the tax break.

Rob Marris: I bow to the hon. Lady’s superior knowledge of common arrangements with certain American film stars, but would such arrangements not come under the rubric of “services” in paragraph (c)? The services would be provided by the American intermediary, as it were, to provide a named actor for a particular British production.

Theresa Villiers: That could be a way to approach the matter. We might be stretching things if we tried to persuade a court to interpret the measure in that way. If there were a requirement to contract directly for something, the court’s interpretation is likely to be that it would expect a company to contract directly with the actor. A very flexible interpretation might solve the problem, but I would be worried if we relied on that kind of tenuous interpretation. The Economic Secretary might be able to reassure us on the point, because I do not believe that he would want to exclude film production companies that enter such arrangements. If he were to provide such reassurance, that would give us comfort. A significant degree of uncertainty needs to be dealt with.
A third problematic issue about the clause is a horizontal one, which stretches across a number of the subsections and relates to co-productions. In this instance, I should like to quote a copy of a letter from a firm of accountants, Malde and Co., who got in touch with me about this issue. It stated:
“The Revenue’s emphasis in clause 32(3) that an FPC should be responsible for ALL the activities set out in subclauses (a), (b) and (c) of clause 32(3) virtually rules out any possibility of an FPC embarking on film production activity as a co-producer with another genuine film production company”.
Subsections (3) and (4) both specifically exclude companies working in partnership and specifically refer to activities “otherwise than in partnership”. I would be grateful if the Economic Secretary would explain why companies working in partnership will be excluded. Some in the industry are concerned that that blanket exclusion may adversely impact on the film industry. Virtually all co-productions seem to involve companies working in partnership. Depending on how one views the law, the mere fact of two companies working together could be sufficient to qualify as a partnership. The exclusion of all partnerships from the film tax credit scheme could therefore limit its scope considerably.

Julia Goldsworthy: On the point about co-productions, subsection (5) states:
“If there is more than one company meeting the description in subsection (3) or (4), the company that is most directly engaged in the activities referred to...is the film production company in relation to the film.”
Does the hon. Lady share my concerns that the British film industry is well known for its post-production skills? In those cases, there may be significant British involvement, but because the company might not be “most directly” involved, it might not qualify under the clause.

Theresa Villiers: That certainly is a concern. It is important to realise that British companies, particularly our indigenous film producers, are heavily dependent on co-production to get their projects off the ground, and we are talking particularly about co-productions with other European countries. If the framework is to work, we must ensure that it works for co-productions. Clearly, in the past, there have been problems with partnerships that have been used as part of the avoidance schemes. I think that there is a consensus that we want to see the back of them. However, my understanding is that many of those tended to be partnerships between individuals, and such individuals cannot take advantage of the tax break because it applies only to companies.
Perhaps there is also anxiety about partnerships between a film producer and a financial company and the Government wishing to prevent the financial entity from being a partner and gaining the tax break designed for the film production company. However, as we have already explored, where there is a partnership, it will be the company working on the film that qualifies for the tax credit; it is clearly provided for in subsection (5) that only one company can qualify, and that is the one most directly engaged in film making. It would be useful to hear the Economic Secretary’s thoughts on what yardstick will be used to determine which company is most directly engaged in film-producing activities.

Rob Marris: Will the hon. Lady give way?

Theresa Villiers: Yes, but then I would like to make a bit of progress.

Rob Marris: The hon. Lady says some interesting things about co-production, but subsection (4) refersto a qualifying co-production, which is specifically defined in clause 36. As far as I can tell it is nothing to do with the interesting and important point that she is making about co-production.

Theresa Villiers: I will take the hon. Gentleman’s word on that, but still I think that there is an important point to address. I would welcome the Economic Secretary’s reassurance on how co-production will be treated under the framework generally.
Amendment No. 34 deals with clause 34, which defines production expenditure and core expenditure. My amendment is about the definition of the latter. Core expenditure has a crucial part to play in the framework before us, because it determines the size of the tax break. Amendment No. 34 seeks to add development costs to the expenditure that can qualify as expenditure giving rise to the tax break. Development costs include scouting for a film, looking for good film ideas, purchasing an option to buy the film rights of a book at some point in future, and script development. Such activities have genuine costs that make up part of the production process.

Edward Balls: The hon. Lady made the case that we ought to exclude the development or pre-production phase from the ambit of the relief, because it is only when one starts the principal photography phase that engagement should occur. However, she now makes the case that development costs should come within the ambit of the tax relief. Is that not an inconsistency?

Theresa Villiers: No, I do not believe so, because we are talking about two different concepts. I am arguing that development costs should be taken into account as core expenditure because they are expenditure that needs to be incurred to make the film. The fact that a particular company may not have been involved in the development process should not bar that film from qualifying for the tax relief. The terms are used in two different contexts in the statute, and it is overly restrictive in the definition of “film production company” to require companies to be involved in development and pre-production. However, I see no reason why development costs should not be part of the expenditure that qualifies for the tax break.
Certainly, many in the industry share the feeling that development costs should be considered part of core expenditure. It would be useful to hear from the Economic Secretary why those costs have been excluded. One of the problems is that the distinction between development and pre-production is blurred; it is difficult to see where one starts and the other stops. That blurred distinction could give rise to disputes with the Revenue about the quantum of the expenditure, and about which expenditure counted for the purposes of the tax break, thus giving rise to the uncertainty that we are seeking to avoid. That, of course, is compounded by the fact that there is no definition of either term in the Bill.
There is a particular problem with the issue of purchase of rights—copyrights, and rights to script and music that are necessary for a film. It is a specific example of the blurred line between development and pre-production, which may cause difficulty if development is not included as part of the core expenditure.
Rights acquisition costs are normally viewed by the industry as part of pre-production rather than development, although at the initial stage the purchase of an option to buy rights such as book rights tends to be viewed as falling into the category of development. Using that argument, most rights acquisitions would fall under the clause as they are part of pre-production. However, the Treasury’s frequently asked questions document states that the acquisition of pre-existing rights is a development cost, which therefore falls outside the scope of subsection (1). It would be helpful if the Economic Secretary could expand on the distinction drawn in the document between the purchase of pre-existing rights, which it states cannot be taken into account in quantifying core expenditure, and rights that are generated during the production of the film. Further detail about that would be very useful.
To close my remarks, I want to mention the concern expressed by the company that I quoted before on the matter of development costs. It said:
“These are not phantom costs but genuine ones.”
It argued:
“Development expenditure is and always has been nothing but a genuine cost of film production and we cannot see your rationale”—
it is the Treasury that is being addressed—
“in excluding it from the definition or meaning of core expenditure.”
Amendment No. 35 and Government amendment No. 26 relate to clause 35, which is another of the controversial clauses and defines UK expenditure, which, along with core expenditure, will be a key determinant of whether and how much tax credit is payable. Subsection (1) provides that UK expenditure covers services performed in the UK and goods supplied in the UK. The film producers association, Pact, has stated that
“the requirements for EU approval (under State Aid rules) of the new credit have resulted in a narrow definition of UK qualifying expenditure being adopted, which is very unhelpful to lower budget co-productions.”
Given the amendments that have been tabled, there seems to be consensus among the Front-Bench teams that we need a clearer definition of goods and services in this context. First, clarification of the distinction between the two would be useful. Would that distinction, in this context, echo the VAT rules under which the supply of goods tends to cover cases in which there is transfer of title, and the supply of services covers all other cases, including equipment rental?
We also need further clarity on the place of performance of the supply of goods and services. Both amendment No. 35 and Government amendmentNo. 26 would address that point, albeit in slightly different ways. Paragraph (a) of my amendment is intended to gain clarification of what is meant by
“services performed in the United Kingdom”.
It provides that if goods and equipment are used in the United Kingdom, although they are rented or bought from an overseas supplier, they would qualify as UK expenditure. Paragraph (b) is intended to clarify the meaning of
“goods supplied in the United Kingdom”.
It would deal with the situation in which costumes and cameras are supplied in the UK and transported overseas.
The Government amendment covers, I think, the same ground as the first part of my amendment; it deals with the concerns behind it to make it clear that goods or services that are consumed in the UK count as UK spend for the purposes of clause 35 and it is clearly an improvement on the Bill. From that perspective I welcome it, but it seems to exclude the latter part of my amendment—the possibility that goods and services supplied in the UK and used overseas could count as UK spend. That is unfortunate given that the type of work that can be done in the UK and consumed abroad is an important part of the UK film business.
The Government amendment confirms the Government’s statements that spending on British crew, actors and craftsmen cannot count as UK spend when it takes place overseas. I see the appeal of that restriction, in that films made in the UK are likely to have a more direct effect in the promotion of UK culture around the world. However, one should bear in mind that films set overseas can promote British culture effectively as well.
One example that springs to mind of a very successful British film is “The Constant Gardener,” which was set largely in Kenya but filmed partly in the UK and Germany. Presumably, it would have a problem qualifying under the UK spend rules in the new framework.
Many small UK producers are worried about the extent to which the restriction on the UK spend is likely to curtail the usefulness of the tax credit. They argue that British talent can be showcased on overseas shoots as much as on domestic ones, and I should be grateful if the Economic Secretary would outline the rationale behind the restriction. It seems that it is motivated purely by the views of the European Commission and the threat of action in the European Court of Justice. As we have already heard today, it is a matter of concern that despite the Government’s tough rhetoric on tax harmonisation, the involvement of the European Commission and the ECJ on tax matters is still progressively increasing. That was extensively discussed in relation to group relief.
The Paymaster General chairs the Primarolo group, which has examined the UK’s film tax rules in the past. It would be useful to hear from the Minister whether any problem is anticipated in respect of the new rules by the group that bears her name. I am sure that the Committee would also value an update on whether the Minister anticipates any problem in clearing the new rules with the Commission. As I have said on several occasions during debate on this part of the Bill, uncertainty has a crippling effect on the British film industry. I am sure that it would value reassurance that there is no danger of sudden changes forced on the Government because the Commission felt that there was a problem in respect of EU rules in this context, or in any other part of the Bill. With that, I look forward to the comments of the Committee.

Philip Dunne: I remind the Committee of the history of the Government’s plans for the film industry, which have been somewhat turbulent, to put it politely. Shortly after they took office in 1997, they set up the ill-fated film partnership scheme. It is a cause of constant surprise to me that despite the wealth—I use the word advisedly—of experience of the film industry and the entertainment industry more widely of Labour-appointed Members in another place, the Government were not able to call on them for help in devising a scheme that would meet the objective of encouraging the film industry in this country without exposing it to the concerns that we are now trying to address—that is, the extent of tax avoidance by the very wealthy.

Helen Goodman: Surely the hon. Gentleman’s point is absolutely ridiculous. Finance Bills are considered in this House. They never go to the other House. It does not have any input into Finance Bills.

Philip Dunne: I am grateful for that opportunity to expand on my point.

John Butterfill: Order. We are possibly getting into a debate on something that is not the subject of the amendment. I should therefore be grateful if hon. Members on both sides would confine their comments to the amendment under consideration and the other amendments to be considered with it.

Philip Dunne: Do I take it from that guidance that we can discuss all the amendments in one go? Or should we confine our remarks to one amendment at a time?

John Butterfill: I remind hon. Members that if they wish to discuss any of the amendments in this group, now is the time to do so. Once the group is finished with, it will not be possible to discuss the amendments again, even though some of them may relate to later clauses. However, they could conceivably be voted upon at a later time, if Members wished to press them to a Division.

Philip Dunne: I am grateful to you, Sir John, for reminding us how this section of the debate is being conducted.
Very simply, my point is that all the clauses and the amendments that we seek to make to them are required to deal with the Government’s policy for encouraging a vibrant British film industry, as they have so palpably failed in their previous efforts. It is worth rehearsing some of the statistics that both the Front-Bench spokesmen have mentioned. Mine are slightly different. I am sure that it is a matter of definition.
Slamming the door to tax avoidance schemes for film partnerships in February 2004 had a significant impact on the British film industry. I understand that the number of films commencing production in the UK, which is slightly different from the numbers discussed by other hon. Members, fell by almost half, from 44 in 2003 to only 27 in 2004. That is a very significant impact. It is even more significant when spending on films is taken into account: it fell from £269 million in 2003 to£118 million in 2004, with a similar but slightly less marked reduction in the number of UK-US co-productions during that period.
That takes me to the amendments, particularly those tabled by my hon. Friend the Member for Chipping Barnet, relating to clause 32 and the definition of a film production company eligible for relief. We are looking to encourage medium and small-budget films, not the major studio productions. The Minister is shaking his head. I understand that less than £20 million is the criterion that we are applying, but perhaps he will clarify if I have got it wrong. I take it from his assent that I have got it right.
Most films with budgets of that size are organised by production companies that seek to bring in production finance from whatever sources are available globally. That involves co-productions with film production companies, distribution companies or other companies around the world that are involved in some element of the film process. It might involve more than one UK company, frequently a company involved primarily in television finance and one involved primarily in pure production.
Confining the benefit of the reliefs to any one company in the context of one film under clause 32(2) misunderstands the way that the industry works. I should be grateful if the Minister would clear up the matter if I have misunderstood it. A number of companies can take on a significant role in a film, and that might be hindered if only one company per film is eligible for relief.
That brings me to amendment No. 34 to clause 34, which would define what expenditure is eligible and what is not. I am perplexed that development costs have been excluded from the definitions of production expenditure under clause 34, as we are trying to encourage the development of an industry. We must encourage it at its roots—at the smallest start and at the origin of a film.
The origin of a film typically involves taking an idea and working up to the point at which it is bankable, so that funding can be sought on the back of the proposition. That is done in what the film industry calls development. A producer engages a writer, typically either a screenwriter or an author, to develop a treatment for the film. That is what is involved in the development cost, which is the seed money for beginning a production.
If that expenditure is excluded from the benefit of relief, there will be no incentive to start making a film in this country. The funding will all be geared toward the making of the film at a later stage. Much of that is undertaken by mature and established companies, not the early stage producers seeking to develop careers in the industry. Can the Economic Secretary tell us whether his intent is merely to help established film producers in this country or rather, as I would hope to be the case, to seek to encourage new, early-stage entrants? If that is the intent, surely development costs should be included within the definition. I support my hon. Friend’s amendment.

Jeremy Wright: May I belatedly welcome you to the Chair, Sir John, and congratulate the Financial Secretary on his promotion?
I want to make a few remarks about the way in which clause 32 may or may not reflect reality in the world of film. I speak not as an expert but, like other members of the Committee, as somebody who watches the occasional film when I have the time. I notice when I do so that a number of production companies feature in the credits before the film starts. It seems to be increasingly common for more than one production company to be involved in the making of a film. That being so, it must be the case that clause 32 makes it extremely difficult for that situation to occur and for each of the companies involved to obtain any kind of UK tax relief, notwithstanding the ingenious machinations of any lawyer who might be involved to redefine the words “responsible”, “engaged” or “direct”.
None the less, I accept that any assistance for the UK film industry is a good thing. I invite the Financial Secretary to consider ways in which he can make it better and more effective. I made the point in relation to an intervention on my hon. Friend the Member for Chipping Barnet that there is a contradiction between clause 32—a rigorous and restrictive structure, designed to prevent more than one company from being involved in the making of a UK film and obtaining tax relief—and clause 41, which indicates clearly that in order for a company to obtain UK tax relief it is necessary only for it to have spent 25 per cent. on UK expenditure. That being so, the Government must envision that 75 per cent. of the expenditure could be spent abroad. If it is, it must be spent on companies that are based abroad. Surely if 75 per cent. of the expenditure is going abroad, 75 per cent. of the work is going abroad, so it must be obvious that lots of other companies are involved in the making of the film. The rubric of clause 32 is too restrictive.
The other difficulty that I foresee, and which was alluded to by my hon. Friend the Member for Chipping Barnet, relates to subsection (5). It is clear that the way in which the Government propose to resolve the difficulty that more than one company may appear through the first parts of the clause to be a film production company is that they require that potential conflict to be resolved by determining which company is most directly engaged in the activities listed in subsections (3) and (4). If I may put it delicately, in an industry that is not necessarily averse to litigation, there might well be a great many long, complex and no doubt expensive legal disputes simply to establish which of several companies involved in the production of a film is the one entitled to UK tax relief. I am sure that the Financial Secretary would not wish that to happen—I certainly would not—and I invite him to reflect on that when he responds.

Stewart Hosie: A great many issues have been discussed, and I will not go over them again. I shall restrict my remarks to Government amendmentNo. 26. The objective would appear to be to change clause 35 to insert
“goods or services that are used or consumed in the United Kingdom”
in the context of the meaning of “UK expenditure”. In the only example that I am aware of in life outside Parliament, a blockbuster film employed a very expensive team of scriptwriters—it was a large part of the cost of production of the film. As the script was the basis of the movie, that was certainly a service consumed in the UK, in Scotland, where the film was wholly set and shot. However, the primary scriptwriter and his team were based in Hollywood. Given that the script, as a service, was wholly consumed in the UK as part of the production of the movie, is it the Minister’s intention that that would be covered under the meaning of “UK expenditure”? It certainly would be if amendment No. 26 were accepted, but from the general tenor of the clause I am not sure whether it would if it were not. Will the Economic Secretary advise the Committee on that?

Edward Balls: The debate that we have had on the amendments shows how wise you were, Sir John, to group them together under this clause, which defines how a film production company will qualify for relief. The essence of the reform is to try to move away from the past difficulties of avoidance.
The contributions made by some members of the Committee show the two ways in which one can attempt to critique or amend the Bill. In her opening remarks, the hon. Member for Chipping Barnet acknowledged, as have the Government, that although there has been growth in the number of UK films being produced and in cinema audiences, there has been an avoidance problem. The scale of expenditure on relief therefore needs to be dealt with. She is broadly sympathetic with the conceptual framework that I have established. Her amendments are intended to strain against and dilute the definitions set out and the requirement that eligible films be British films, made by British film makers in our country. We must tackle the problem of avoidance and move away from the idea that we are simply offering a tax relief to a financier or a partnership. I shall respond to all of her points.
On the other hand, the point made by the hon. Member for Ludlow (Mr. Dunne) was factually incorrect. He gave the impression that we are discussing enhanced tax relief for only small films. In fact, a film costing under £20 million will benefit from 20 per cent. enhanced relief, and a large film with a budget of more than£20 million will also benefit from enhanced relief, just not quite as much: 16 per cent. The reason why I—

David Gauke: Paused.

Edward Balls: The reason why I paused was that I wanted to check that I was right to tell the hon. Member for Ludlow that he was wrong. Having checked that I was right, I can now tell him that he was wrong on that point.
The hon. Lady said that the rising scale of relief was a potential problem, and the hon. Gentleman said that we slammed the door on the film industry in 2004-05. He gave the impression that he would have preferred the status quo ante, before the reforms—the tax regime that was put in place in 1992, and which we inherited in 1997. One of the problems is that, despite repeated amendments, that regime is flawed and needs to be replaced so that we can tackle the problem of avoidance. He is right; we have slammed the door on the risk of avoidance and are instead putting in place a new model that will be fit for purpose.

Theresa Villiers: Is the Economic Secretary seriously saying that the problems with film tax relief since 1997 are due to the previous Government? He may be trying to slam the door, but it is taking quite a long time.

Edward Balls: To be fair, I was not trying to make a party political point. A regime was put in place in 1992 and has been allowed to operate for well over a decade. In that time, the industry has seen an opportunity for tax avoidance. Despite repeated attempts to tackle the problem since 2000, we have all reached the conclusion that the fundamental model is flawed and needs to be replaced. All that I was saying to the hon. Gentleman was that if, as he believes, the scheme is a failure for tax avoidance reasons, that is a collective failure of the model inherited in 1997. If, as I heard him say, the failure was not the avoidance, but the fact that we have tackled the avoidance, we have a fundamentally different view of our responsibilities for the tax system. Our responsibility is to make sure that the tax reliefs are used for the purpose that we intend, which is to make sure that British films are made in Britain, not simply to allow people to avoid tax.
If the hon. Gentleman’s criticism of the Government’s approach in the past 18 months is that it has caused uncertainty and a fall in the number of “films” or the tax relief by slamming the door on avoidance, I think that that is the right approach. My sense was that, while we may debate some of the details, there is a consensus across the Benches about the importance of replacing a flawed model.

Philip Dunne: I am most grateful to the Economic Secretary for allowing me to respond to his remarks. My criticism was not that the provision was a belated attempt to deal with the problem of tax avoidance after the event. It was that tax avoidance had been progressively worse for a number of years and, instead of the Government coming up with measures to encourage the film industry at the same time as dealing with the avoidance, they chose to slam the door on the avoidance and spend the next 18 months coming up with an alternative regime. It would have been better to have done the two in tandem because the Government had plenty of warning that the avoidance was taking place.

Edward Balls: It is certainly the case that measures were put in place over a number of years in an attempt to tackle the avoidance, such as those I read out earlier in respect of the Finance Bill. There were repeated attempts to do that. The conclusion was reached that the model was flawed and that we needed to move to a better way of supporting the film industry, one that was in line with the way in which the modern film industry works and which achieves what needs to be achieved. We did not simply scrap the old reliefs. As part of the Bill, they are being removed as a new regime comes into place. We wanted to consult as widely as possible to make sure that we had a fit for purpose regime that could last into the future.
From reading the comments of experts and practitioners during the consultation, my sense is that, while there may be some debate about the details, that is what we have achieved. The Bill will provide a model that will allow the British film industry to go from strength to strength. To take the time to do that in order to get it right is the right approach to tax policy. Last summer’s consultation paper, to which the hon. Member for Chipping Barnet made reference, outlined the diagnosis of the problem and also the principles which were to guide the approach. Those principles are all being enacted in the Bill.
In the main, the consultation paper has been preserved in the legislation. However, we have made one important concession. We said originally that there had to be 40 per cent. British expenditure to qualify for the enhanced relief, but following the consultation, the Government generously decided to reduce that to25 per cent. to make sure that even more British films could benefit. The consultation was good; it was well conducted by officials as well as Ministers. If we get this right today, we will have a model which will be of benefit to the British film industry.
Moving on to discuss the amendments, the first of which has been moved and the rest of which will be moved in due course—

John Butterfill: Or may not be.

Edward Balls: Or may not be. We will be able to cover all of the issues that are relevant to the clause as a whole. I will take them in a different order because they fall into a number of discrete groups. Amendments Nos. 31, 32, 64 and 65 are about change in the definition of a film production company for the purposes of the chapter. Amendment No. 34 seeks to widen the base upon which film tax relief will be provided. AmendmentNo. 47, which we referred to in the earlier debate, would exclude films not made to be shown in cinemas, such as TV programmes, from the basic tax treatment set out in schedule 4. Amendment No. 35 attempts to refine and clarify the meaning of UK expenditure and has been referred to by other hon. Members.
I shall make a few general conceptual comments about what we are trying to achieve, which will help to meet some of the hon. Lady’s concerns, in particular those about what a “film production company” means and why it has been defined as it has for the purpose of the clause.
As I said earlier, the most important feature of the new relief, and a fundamental way in which it differs from its predecessors, is that it is directed at the film makers, not the financiers, a partnership or a middleman. That is deliberate, because we do not want the tax incentives to be diverted to intermediaries or investors; we want them to go to the film makers themselves. That is the fundamental goal that we are trying to achieve in order to tackle avoidance.
The purpose of the clause is to define those film makers as film production companies and ensure that those people benefit. The definition in subsection (3), to which hon. Members have already referred, follows extensive consultation with the industry. I shall not spend a huge amount of time talking about it, but there has been a reference to the nature of the film-making process. Unfortunately, I do not have a direct family member involved in the film industry, so I cannot claim the degree of knowledge that the hon. Lady possesses. She was eloquent in her use of technical terms, but I shall attempt to come close to matching her with my discussion of the creative process.
By having one “film production company”, the important thing we are trying to do is make it clear that in the making of the film and in the essence of that film, there is a being, a person, a film production company that controls the process, and that that entity, the individual or vehicle, is consistent throughout the different stages of film making, from pre-production to completion.
The first requirement is that a film production company be responsible for the development phase—the initial concept or idea for the film. In advance of the pre-production phase, there is the development phase, as the hon. Lady mentioned. It is the period before the film-making proper starts. With the development phase, in which the initial idea is put together and the film is conceived, one could say that J. R. Tolkein played a very important role in the conception of “The Lords of the Rings” film trilogy. It was an essential part of the development phase, but we would not think of the film having been made at that stage. The making of the film proper begins at the end of the development stage, when one has the story and has conceived of the idea. At that point, the tax support that we envisage for the making of the film kicks in.

Stewart Hosie: The Economic Secretary mentions—

Iain Wright: The hon. Gentleman is an expert on “The Lord of the Rings”.

Stewart Hosie: No, not in the slightest.
The Economic Secretary mentions Tolkein. What if Tolkein had been commissioned to write a Lord of the Rings-type, swords and sorcery, elves and demons concept as part of production? Would that have counted, or would it have been outside the scope?

Edward Balls: The hon. Gentleman helpfully allows me to make it clear where the line is drawn. It is absolutely right that one has to draw a line to delineate the point at which we believe the making of the film begins. It is clear that when writing the book, J. R. Tolkein was not part of the making of the film. It was a much earlier stage than that. There is a long development stage, which often involves people trying to commission or write scripts. There could be a book, or the script could be for a film, a television show or whatever. During that creative process and in that development stage,the production of the film has not begun. To obtain the enhanced tax relief that supports the making of the film, the line has been drawn after that conceptual development stage.

Stewart Hosie: Would the storyboarding of “The Lord of the Rings” be part of production, before the detailed script is written?

Edward Balls: The process in the consultation has been to separate the stages of the film-making process. The development stage takes place before the pre-production stage begins. A lot of thinking goes on in the development stage, including the writing of a script and consideration of which actors might be part of the film. All those activities take place before the pre-production stage begins and would fall under the definitions set out in the legislation. The initial conception of possible story boards for a film would take place in that development stage. That is not to say that there are no costs involved or that they could not be set against income for tax purposes. However, if we are trying to incentivise the making of a British film, we must draw a line between developing the conceptual framework and moving into pre-production. One starts to contract for the making of the film at the pre-production stage.
On the basis of the consultation, it is understood in the industry that there is a distinction between amuch broader conceptual, speculative phase, which is development, and saying, “This is a film; this is a script. We’ve gone beyond the point of creative speculation. We’ve decided to make the film and we’re now going to commission all the things that we need for it in the pre-production phase.” That is understood in the industry and therefore reflected in the amendment. There is a process called pre-production, which is a clear phase in the making of a film that comes only when one has gone beyond the speculative, creative phase and decided to make the film.

Brooks Newmark: The Economic Secretary is floundering slightly. The definitions that he is offering are open to interpretation. My concern is that there will be an incentive for smart tax accountants to shove what might generally be viewed as pre-pre-production into pre-production. I am curious as to how he will get over the problem of who will play Solomon in those decisions.

Edward Balls: It is widely understood in the industry that after the development phase, when the conceptual phase is taking place, there is a particular point called green light. At the point of green light, the film gets the go-ahead, the studio is booked, the financiers come in, the legal documentation is brought together and the special purpose vehicle is created to bring together all the different elements of the creative phase—people, rights, obligations and risk—into one legal entity. At that green light stage, when a film moves from development into pre-production, the tax incentive starts to kick in.

Brooks Newmark: Once again, the Economic Secretary shows that he perhaps does not understand the creative accounting that tends to go on. My concern—I still do not understand how he is going to get us over this hump—is that the definitions that he has come up with will not be clear and that there will be a tendency to show what was pre-green light as pre-production. I still do not understand how the Government propose to oversee that and decide who should play Solomon in those very decisions.

Edward Balls: The hon. Gentleman makes a good point. In defining the stages, we must ensure that the opportunities for ambiguities or avoidance are reduced as far as possible. That is exactly why we are specifying clearly that there must be one film production company responsible for all the phases from the beginning of the pre-production phase right through to completion, rather than a number of overlapping entities. There has been extensive consultation with industry figures to ensure that the terms pre-production, principal photography and post-production of a film, as set out in subsection 3(a)(i), are clearly defined and understood in the industry.
In a way the difficulty we face was the point I was going to make in response to the hon. Member for Chipping Barnet: we need flexibility in the way in which the legislation is enacted. We need flexibility in guidance and the way in which the tax authorities treat the production company. We are not saying, as was suggested earlier, that the film company must do all the pre-production, principal photography and the third stage itself. We are not saying that it cannot work in partnership or subcontract part of the work to other companies. The important point is that, through these phases, an entity must be actively engaged rather than simply being a financial shell in order to divert tax revenues.
The way that the FPC will operate will be differentin every case and there has to be flexibility in the way in which we interpret the amount of its engagement in each of the three stages. It will not be a black-and-white situation. The important thing is that we will be able to track the responsibility of the FPC through all the three stages. Companies have to be actively engaged in making a film. The tax relief is for making a film, not for writing a book or for simply saving or avoiding tax.

Brooks Newmark: I very much appreciate where the Economic Secretary is trying to go. On the one hand, he is trying to create specific definitions of what is pre-pre-production and what is pre-production, but on the other, he says that there must be some flexibility. To me, flexibility means ambiguity, so my concern is how the Revenue will interpret a piece of an advice given by an accountant as opposed to what the Government want it to be.

Edward Balls: It goes to the very essence of making tax policy to ensure that there are rules that are understood by people who are going about a piece of businessor undertaking a project and that have common application, while ensuring that there is flexibility to deal with the circumstances of each individual trade. No two films will look the same, or be financed or produced in the same way. The question is whether we have a model that allows us to be confident that, when attempting to subsidise through the tax system the making of a film, the FPC is actively engaged in each of the three stages.
On the basis of our consultation with the industry, we have come up with a definition that is much better than the previous one because it makes clear that, to some extent, there should be active engagement by the company in each of the three stages involved in the making of the film. The FPC could be making a film, but not rolling the cameras; it could be making a film, but not actually booking a studio or getting actors in; or it could be making a film without being involved in distribution. However, if it is not involved in any of those three activities, it is not making a film. The guidance and the tax case law, as it develops, will make clear exactly how that will be applied in practice.

Philip Dunne: It is now clear where the Economic Secretary is seeking to draw the line. I happen to think that he is making a mistake in that development cost expenditure ought to be included as a legitimate expense of a film production company, but I would like to draw his attention to a couple of clauses.
The Economic Secretary is creating confusion through the drafting. In clause 33, there is a definition of film-making activity that includes the word “development”. That is picked up in paragraph 5(1)(a) of schedule 4 which refers to
“film-making activities in connection with the film”
thereby picking up development costs from clause 33. The first line of paragraph 4(1) of the schedule refers to the development costs of a film, so the Economic Secretary seems to be clearly expressing an intent to the Committee that is not reflected in the drafting of the Bill.

Edward Balls: I do not think that that is right. The hon. Gentleman should find that clause 32(3)(a) is very clear. A film production company is defined as a company that is responsible:
“(i) for pre-production, principal photography and post production of the film, and
(ii) for delivery of the completed film”.
To qualify for the tax relief it needs to be involved in all three stages and the definitions are commonly understood in the industry. In the earlier phases, the costs that can be set against tax in the normal way are not part of the making of a British film for these purposes so they are not included. We had to draw the line somewhere and we consulted widely with the industry before coming to that view.

Jeremy Wright: I want to take the Economic Secretary back to what he said about subsection (3) when he indicated that it would be remarkable if a British film or, indeed, a film of any other nationality, did not involve one of the activities in subsection (3)(a), (b) or (c). I agree, but the difficulty is that because of the way in which the clause is drafted, the provisions in those paragraphs are conjunctive and not disjunctive. All three must be done to qualify. The difficulty that Opposition Members have highlighted is that there are situations when companies may not be involved in all those activities, but may still qualify in ordinary language as a film that deserves tax relief.

Edward Balls: We are trying to put into statute definitions that ensure that that the tax relief is properly applied and goes only to genuine British film makers. We do not want to introduce loopholes that allow the tax resource to be diverted elsewhere to shell companies and so on.
If “responsible for” meant that a company had to finance the relevant activities in their entirety, if “actively engaged in” meant that it had to do everything, or if
“directly negotiates, contracts and pays for”
meant that it could not involve or buy in expertise to advise it or to do some of those things, the hon. Gentleman would be making a good point. However, that is not the absolutist way in which this is being set up. We are requiring active engagement, which does not mean absolute engagement. We are not being prescriptive and we are not saying that, to qualify, a company must be responsible for every aspect of every activity. Clearly, the degree of activity will vary film by film, case by case and with some films there will be much more active engagement by the film production company in the pre-production phase or the completion phase than in others. The important point is that to qualify the film production company must have some engagement in the pre-production and completion phases. It cannot opt out of one phase or the other.
I hope that that provides some clarity for the hon. Member for Chipping Barnet because she made the same point earlier. We are not saying that a special purpose vehicle cannot be used or that the company must either work in isolation or do everything itself. We are saying that it must be engaged in, have responsibility for and negotiate each aspect of those three phases, but it may do so in partnership with others or by bringing in other services from Britain or overseas. The important point is that we will not allow the tax relief to go to a partnership. There may be a partnership, but the tax relief will go to the British film maker and the British film maker must be a film production company—a vehicle that meets each of the three tests in the clause. I hope that that provides clarity.
I come now to the details of the amendments. First, amendment No. 31, as the hon. Lady said, would remove the obligation on a film production company to have responsibility for pre-production activity. As I explained, we believe that a film maker must be actively engaged in, and be responsible, for the pre-production phase. We are not saying that that is an absolute or inflexible definition and it is possible to have a greater or lesser engagement in the pre-production phase but, on the basis of our consultations, we believe that it would be a mistake for the provision to apply if there is no engagement as that would suggest that we did not properly understand the delineation between speculative development and the beginning of the production process.
Likewise, amendment No. 32 would weaken the definition of a film production company by removing the requirement that it must be involved in negotiating, contracting and paying for the various rights, goods and services that together make up the expenditure on making a film. Again, and for reasons that I hope I have made clear, any company that is not involved in negotiating contracting and paying for the fundamental elements of making a film cannot be the controlling entity or the essence of the making of that British film, which is what we want to achieve in the provision. I stress that that does not mean all of the film.
Debate adjourned.—[John Heppell.]

Adjourned accordingly at Seven o’clock till Thursday 18 May at five minutes past Nine o’clock.